HM Revenue and Customs v DCC Holdings (UK) Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Moses,Lord Justice Rimer,Lord Justice Rix |
| Judgment Date | 10 November 2009 |
| Neutral Citation | [2009] EWCA Civ 1165 |
| Docket Number | Case No: A3/2008/2759 |
| Court | Court of Appeal (Civil Division) |
| Date | 10 November 2009 |
[2009] EWCA Civ 1165
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT (CHANCERY DIVISION)
Before: Lord Justice Rix
Lord Justice Moses
and
Lord Justice Rimer
MR Justice Norris
Case No: A3/2008/2759
Mr Michael Furness QC and Mr Michael Gibbon (instructed by HMRC, Solicitor's Office) for the Appellant
Mr John Gardiner QC and Mr Philip Walford (instructed by Messrs Reynolds Porter Chamberlain LLP) for the Respondent
Hearing dates : 22 nd-23 rd July, 2009
Lord Justice Moses :
In 2001, in five “fixed price repo” transactions, the respondent, DCC Holdings (UK) Limited (“DCC”), bought gilts from X Bank; X Bank simultaneously agreed to repurchase the same or identical gilts at specified future dates for a fixed amount of cash. The substance of these transactions was a secured loan, whereby DCC lent cash to X Bank whilst the benefits and risks relating to the security were retained by X Bank. DCC's profit from those five transactions, recognised in its profit and loss account, was £1.8m. But in its return for its accounting period ending 31 March 2002, it claimed a non-trading deficit of just over £27m.
If that is the effect of the material provisions of ICTA 1988, and of the Finance Act 1996, then the legislation which purports to bring into charge the profits, gains, losses and interest arising from those transactions has not merely misfired, it has caused the charge to explode in the muzzle. The Special Commissioner, Mr Charles Hellier, dismissed DCC's appeal against the Inspector's refusal to allow the claimed deficit ( [2007] STC (SCD) 592). He concluded that the net credit to be brought into account was £1.8m. On appeal Norris J allowed DCC's appeal and computed DCC's deficit at £24.1m ( [2008] EWHC 2429(Ch), [2009] STC 77).
All five repurchase transactions, “repos”, took the same form. DCC owned the gilts, 10% Treasury Stock 2003, for periods which varied between 11 and 42 days. The repurchase price for the gilts was fixed not by reference to their market value but by reference to the cost of the money provided by DCC representing the sale price during the repo term. During the term of each of the repos, DCC received payments of the semi-annual coupons on the gilts. If DCC had been required to remit those payments of interest to X Bank, the repo would have been termed a “gross paying repo”. However, it was agreed that, in respect of each repo, DCC would not be required to do so. Instead, since DCC was to retain the coupon it was agreed that the repurchase price would be reduced to reflect the income DCC had received, but allowing for a notional rate of interest. The coupon, which in each of these repos was of a value which exceeded DCC's agreed economic reward, was used both as a payment on account of the interest and as part repayment of the loan. Such a repo is called a “net paying repo”.
The full details are contained in an agreed Statement of Facts. It suffices to illustrate the nature of the five net paying repo transactions by reference only to one. On 30 August 2001 X Bank (an overseas company) sold to DCC (a UK resident company) in DCC's accounting year ending 31 March 2002, *£149m nominal of 10% Treasury Stock 2003 for £170m, and on 10 September 2001 X Bank repurchased an identical parcel for £163m. The repurchase price represented the original sale price plus interest thereon for 11 days at 4.65% less coupons received by DCC on the repo securities of £7.45m.
In the five transactions DCC bought gilts for £812m from X Bank, and resold them to X Bank for £785m, in the meantime receiving total coupon payments of £28.8m. Overall, DCC received £1.8m more than it had paid (£785m (repurchase price) + £28.8m (coupons) -£812m (acquisition price) = £1.8m).
Neither the taxpayer nor the Revenue sought in any way to criticise Norris J's clear and accurate summary of the relevant legislation [9]-[20]. But in order to identify the issues, and explain their resolution, I too must follow the course of the legislative labyrinth, grateful for the red thread which Norris J, in Ariadne mode, has left for this court to unwind and wind in seeking to reach the statutory core of the maze. That core is to ascertain the credits and debits, to be brought into account under s.84 of the FA 1996 in respect of DCC's loan relationships (whether defined in s.81 of the Finance Act 1996 or deemed to exist in other statutory provisions). Once those credits and debits have been identified, s.82(1) requires them to be used to compute, for the purposes of corporation tax, either profits and gains or any deficit arising from the company's loan relationships in an accounting period, by subtracting the aggregate of non-trading debits from the aggregate of non-trading credits. The result will show whether DCC made a non-trading profit, chargeable to tax under Case III of Schedule D, or was entitled to relief, for which s.83 makes provision, in respect of a non-trading deficit (s.82(4)-(6) FA 1996).
As the journey starts, it is as well to bear in mind the underlying technique which the draftsman has chosen to adopt. For the purposes of corporation tax, Chapter II of Part IV of the FA 1996 introduced a discrete and exclusive code for the taxation of all the profits and gains of a company arising from its loan relationships. All such profits and gains are to be chargeable and only chargeable as income (s.80(1) and (5)). Following the traditional form by which income is taxed under UK fiscal legislation, Chapter II identifies the source of the income it brings into charge as a loan relationship.
Loan relationships are defined as relationships in which a company stands in the position of creditor or debtor as respects any money debt and the debt arises from a transaction for the lending of money (s.81). It is important to have in mind that this method for bringing income into charge under Chapter II is deployed not just in relation to income arising from the legal relationship of debtor and creditor as defined by s.81, but also in relation to that which the statute deems to be income arising from a relationship deemed by the statute to be a loan relationship. The Chapter applies, in short, to fictional income arising from agreements which do not, in accordance with the definition in s.81, create a loan relationship.
This appeal demonstrates three examples of this statutory scheme, two examples of fictional interest from fictional loan relationships, and one example of real interest under a loan relationship, as defined by s.81 FA 1996.
The first example of fictional interest arises under the fixed price repos themselves: X Bank and DCC disposed of and re-acquired capital. The differential between purchase and repurchase price was not income but a capital profit gained by DCC. But the statutory scheme creates fictional income, flowing from a fictional source, called a loan relationship. That income is called interest, but it is a fictional characterisation.
The second example of fictional interest arises in relation to the manner in which the repo agreements dealt with the coupons DCC received. Had DCC been obliged to remit to X Bank sums representing the amounts of the coupons it received, pursuant to a gross repaying repo, it would not have been paying interest. But the statutory scheme characterises such a payment as manufactured interest (Schedule 23A Para 3 TA 1988). Pursuant to the terms of the net paying repos, DCC was not required to remit to X Bank the amounts representing coupons DCC had received from the Treasury, and X Bank never received such sums. But under the legislative scheme, DCC is deemed to have paid and X to have received a fictional amount of interest, called deemed manufactured interest.
The third example shows that the only loan relationship within the s.81 definition in this appeal was the relationship between DCC and the Government and the only payment of real interest was by the Treasury to DCC when the five coupons fell due for payment.
Once the fictional interest and real interest is identified, it is brought into account either as an interest credit or as an interest debit by s. 84( 1). S.84(1) applies two distinct criteria to the sums to be brought into account, the first requiring the application, in this appeal, of an accruals basis of accounting, the second that the sums should, when taken together, fairly represent all the interest under DCC's loan relationships.
I start with the only uncontroversial application of this statutory scheme, that is, its treatment of the difference between the price paid by DCC for the gilts and the price paid by X Bank on repurchase. The effect of the relevant statutory provisions was not in dispute. S.730A TA 1988 applies to fixed price repos. It applies where the original owner, X Bank, transfers any securities to another person, the interim holder, DCC, under an agreement to sell them, and under that agreement X Bank is required to buy them back, and the sale and purchase price are different (s.730A (1)(a-c)). Where the repurchase price is more than the sale price then the difference is to be treated as a payment of interest made by the repurchaser, X Bank, on a deemed loan from the interim holder, DCC, of an amount equal to the sale price (s.730A(2)(a)).
In fact the repurchase price of the gilts was less than the sale price. In aggregate, DCC agreed...
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